Question 4.Act.15: What is the internal rate of return of the Chaotic Industrie...

Financial Management for Decision Makers

What is the internal rate of return of the Chaotic Industries project from Activity 4.2 ?

(Hint: Remember that you already know the NPV of this project at 15 per cent (from Activity 4.12 ).)

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Since we know that at a 15 per cent discount rate, the NPV is a relatively large negative figure, our next trial is using a lower discount rate, say 10 per cent:

Time	Cash flows £000	Discount factor 10%	Present value £000
Immediately	(150)	1.000	(150.00)
1 year’s time	30	0.909	27.27
2 year’s time	30	0.826	24.78
3 year’s time	30	0.751	22.53
4 year’s time	30	0.683	20.49
5 year’s time	30	0.621	18.63
6 year’s time	30	0.564	16.92
6 year’s time	30	0.564	$\underline{16.92}$
NPV $\underline{( 2.46 )}$

This figure is close to zero NPV. However, the NPV is still negative and so the precise IRR will be a little below 10 per cent.

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